2014 | World Finance

Erdoğan’s legacy continues as Turkey braces for another crisis

Posted on September 2, 2014 by Ashton Wenborn

In 2013 the Turkish government unveiled a scheme to reconstruct the old Ottoman military barracks in place of Taksim Gezi Park, and thus the seeds of a 3.5 million-strong uprising were planted. It wasn’t long until hundreds – and later thousands – of protestors took to Gezi Park, first to stop trees from being felled, and later to voice a far wider sense of discontent with the way in which an increasingly authoritarian government had encroached upon its people’s freedom.

What followed was a hammer-and-tongs crackdown on those camped at Gezi Park. It was here that pictures of battered and bloodied protestors hit the headlines and the country’s then Prime Minister, Recep Tayyip Erdoğan, was labelled an enemy of the people by the international press.

Over a year on from the eight deaths and 8,000 injuries to have come as a result of the uprising, Erdoğan has been made president. And while, for some, the prospect of Erdoğan as president seems absurd, his national legacy is arguably greater even than Mustafa Kemal Ataturk, the reformist statesman responsible for forming modern-day Turkey.

In the years prior to Erdoğan’s reign, the country faced a decade of economic uncertainty, as well as a series of out-and-out military conflicts. Inflation, at its peak, was running at 90 percent and the vast majority of the country’s tax revenues were being put towards keeping national debt in check. The obstacles, at the time, seemed impossible to overcome, yet Erdoğan and his Justice and Development Party (AKP) took it upon themselves to reverse the country’s fortunes, and set the $1trn-plus economy well on its way to breaching the world’s top 10.

Erdoğan’s legacy looks soon to unravel, however, as the country braces for another crisis, and one that looks to plunge the battle-hardened population into an economic downturn. Turkey’s economic prospects are fading fast, and many are concerned that Erdoğan’s hard-headedness and increasingly authoritarian streak could put the national economy in jeopardy.

What was once a relative safe haven in a rickety community of emerging economies has come to represent something of a crisis zone

Boom and bust
Since 2002, Turkey’s GDP and per capita income has near enough quadrupled in size, owing to continued and explosive growth in the construction and consumption sectors, as well as a major windfall for commodities in emerging markets. Throughout this same period, some of the country’s better-known destinations have transformed almost beyond recognition, and construction work on skyscrapers, shopping malls and any number of ambitious infrastructure projects has shown no sign of slowing.

Turkey’s growth has been all the more impressive given that it sits in such close proximity to crisis stricken nations such as Greece and Syria. For international investors, Turkey represents a haven of stability in an otherwise volatile community, and this, coupled with the government’s eagerness to welcome foreign investment, has turned Turkey into a budding economic opportunity.

However, on pausing to take a closer look at Turkey’s last decade, it soon becomes clear that the country is fast-approaching a dangerous predicament, similar in nature and in scale to the one suffered by its more developed counterparts only a few years ago.

A crisis zone
What was once a relative safe haven in a rickety community of emerging economies has come to represent something of a crisis zone. The government is facing an anti-corruption probe, the currency has sunk to record lows, its firms are forced to contend with mounting debts, and the once explosive economy is slowing to a crawl. Just last year the country’s stock market lost a third of its value, annual GDP growth clocked in at barely over two percent, and inflation far exceeded the five percent target set by the central bank.

The IMF closed out 2013 by warning that the country could only sustain its high level of growth at the “expense of growing external imbalances”, and advised policymakers to focus on reducing external vulnerabilities in order to break free of a perpetual boom and bust cycle.

As a result, support for Erdoğan, which has been driven predominantly by economic prosperity, is beginning to wane, and the country looks poised now to enter a new post-boom era of lacklustre economic activity.

The principle cause for the downturn, in short, is an overreliance on credit-driven stimulus and an overarching air of short-terminism in the way in which the government has attempted to catapult the economy to premier league status.

As has been the case in so many emerging markets, the foreign-dependent, debt-financed economic model has fallen foul of sudden changes in global financial markets. And where once policymakers were presented with the opportunity to invest wisely and lay down the foundations for long-term prosperity, the consequences of not doing so have turned the country into yet another misfired success story.

Erdoğan’s dominance
Erdoğan, whose popularity boils down to the country’s rosy headline figures in years passed, should be held at least partly responsible for Turkey’s slide. When the country’s inflation and current account deficit came in at over seven percent last year, Erdoğan refused to raise the headline interest rate, which served only to underline the stubbornness and heavy handedness with which he can sometimes address economic challenges.

It is this facet of Erdoğan’s character, combined with the increasing centralisation of economic power that troubles onlookers, given that any ill-advised policy decisions could pass without scrutiny. As was made clear by last year’s uprisings, Turkey’s population is concerned about the economic clout Erdoğan and his party wields when it comes to making economic decisions, and most would like to see his influence cut back.

It’s true that Erdoğan has restored a measure of stability to Turkey’s economy. However, the headline figures fail to paint the complete picture, and the country’s policymakers must surely concede that mistakes have been made in the lead up to the recent downturn; mistakes that must be rectified should Turkey cement a more sustainable means of growth.

Saudi Arabia’s economy is ‘very strong, very resilient’ | Saudi Hollandi Bank

Posted on September 2, 2014February 19, 2016 by Ashton Wenborn

Saudi Arabia is the largest economy in the Gulf Corporation Council, and with stable outlooks from the major ratings agencies such as Fitch, Moody’s and Standard & Poor, its growth looks only set to strengthen. World Finance speaks to Bernd van Linder, Managing Director of Saudi Hollandi Bank, and Khalid Al-Muammar, CEO of Saudi Hollandi Capital, to find out more about developments in the region.

World Finance: Well Bernd, if I might start with you, Saudi Arabia is of course known for its oil wealth. Is this still the driving factor behind the country’s economy today?

Bernd van Linder: The Saudi government has set out on a very ambitious diversification programme, under its vision 2020. The aim of this programme is to turn the economy into a knowledge-based one, away from pure oil. Under this programme, there have been very substantial investments in research and development, such as the set-up of one of the top research universities in the world, King Abdullah University of Science and Technology. But there are other research centres throughout the country. In time, these investments will result in the economy becoming more diversified, a knowledge-based one. If you look a the economy today, it is obviously benefitting from massive government investments in infrastructure, such as universities, schools, hospitals, roads, public transportation, but there’s more. There is substantial investment from the private sector. The fast-growing Saudi middle class are demanding all kinds of products, and there’s a growing population, very strong demographics in the country. If you combine all of this, you see an economy that is very strong, very resilient. The non-oil private sector is growing 4-6 percent every year, and I expect that to continue, so on the whole it’s government investment, private sector investment, growth of the middle class, growth of the population, all of these driving a very strong and resilient economy.

Since 2010, we have been able to grow our assets at a 14 percent cumulative annual growth rate, and our net profits at a 24 percent growth rate

World Finance: Now there is a government drive to focus on SMEs. Why is this, and what initiatives are in place?

Bernd van Linder: When you look at SMEs over the world, they are a main generator of jobs. In Saudi Arabia, we have a young and growing population, and there is a need to create jobs, and I believe SMEs have an important role to play in creating those jobs. All of the players in the economy, the government, private sector, the banks, they’re all focusing on developing this sector. There are initiatives like training days for SMEs at the chambers of commerce. There are private sector companies supporting SMEs in their development and growth, and there is a very important initiative, a joint initiative of the government and the banks called Kafala, which is a guarantee programme. Under this programme, banks are able to obtain government guarantees for up to 80 percent of their exposures on SMEs, and this is of course a great benefit to the banks, and helps to turn this into a very important business for the banks.

World Finance: Saudi Hollandi bank was the first operating bank in the kingdom, but how has it performed over the last few years considering the global financial crisis, and what do you see driving its growth in the future?

Bernd van Linder: Since 2010, we have been able to grow our assets at a 14 percent cumulative annual growth rate, and our net profits at a 24 percent growth rate. This has also resulted in our share price more than doubling over the same period, so we’ve been doing very well. Traditionally we have been a bank that is strong in dealing with large corporates, and we want to continue to be strong in dealing with those corporates. But we’ve also expanded our business with mid-size corporate customers, with SMEs as we discussed, and with retail customers. We are considered a leading bank in dealing with SMEs. We are one of the leaders in home finance, we are one of the fastest growing banks in the home finance segment, and we want to continue to be strong players in those. We believe that SME banking and retail banking will be the main drivers of our growth. So in future you will see large businesses, mid-size corporate businesses, SMEs and retail customers all contributing to our future growth.

World Finance: Well Khalid, over to you now, and let’s look at the Saudi stock market. How do you see this as performing, and how does it compare to other markets?

We are one of the leaders in home finance, we are one of the fastest growing banks in the home finance segment, and we want to continue to be strong players in those

Khalid Al-Muammar: The Saudi stock market is the largest stock market or stock exchange in the region, with a market value of over 2tn Saudi riyals, or $500bn. Since the beginning of 2014 the performance has been very positive. That has been boosted further in the last few weeks, when the government has announced the acceptance of foreign institutional investors to come in and directly invest in the market. This has boosted the performance to 24 percent since the beginning of the year. Comparing this to the other GCC markets, we see that, as compared to Qatar for example is 28 percent growth. Dubai continues to lead the GCC markets, with about 45 percent growth since the beginning of the year.

World Finance: Well what upcoming IPOs are the ones to watch?

Khalid Al-Muammar: The most anticipated IPO is the National Commercial Bank, NCB. This is the second largest bank in Saudi Arabia, it has a total of $100bn worth of assets. It had a profit of $2.1bn in 2013. The government, which owns the majority of the bank is looking at selling 15 percent, which has a value of around $4bn. This will make it the largest IPO since that of STC bank in 2003. Other IPOs to watch are those of Al Habib, which is the largest private healthcare provider in the region. Also ACWA Power, which is a water and power company, and CPC which is part of the Binladin Group, and it’s specialising in construction and building materials.

World Finance: Well finally, how advanced is the sukuk market, and how do you see it developing the future?

Khalid Al-Muammar: The sukuk market has developed tremendously in the last few years. We’ve seen in 2007 through 2009 on average three or four issues per year, with a value of around 8bn SR. This has grown to 11 issues last year with a value of over 40bn SR, making it the second largest sukuk market in the world after Malaysia. Now the expectation for the future is for this market to develop further, with corporations as well as banks tapping into the alternative markets, basically, to grow their assets further.

World Finance: Bernd, Khalid, thank you.

Both: Thank you.

Banco Carregosa becomes one of Portugal’s most capitalised banks

Posted on September 2, 2014August 28, 2014 by Ashton Wenborn

Looking back to 2008, it now seems clear that there was a place in the industry for a small private bank, where clients would be treated with care and diligence, and where tradition, wealth protection and a client’s best interests would be paramount. This was when Banco Carregosa became a licensed bank, when, at the time, there were an endless number of reasons not to start a bank.

Since then, Banco Carregosa has succeeded where other banks have failed. It is now recognised as a respectful, conservative and solid financial institution and is one of the most capitalised banks in the industry, with a core tier ratio consistently above 20 percent. Assets under services have been growing steadily, reflecting both the increase in clients as well as the average volume per client.

The Portuguese economy had one of its most difficult periods of financial stability over the last 10 years. Its banking industry suffered the effects of the crises, with public debt, the absence of growth and high unemployment leading the country to ask for external support in 2011. It has been a long period of struggle, with families being affected by lower income, higher taxes and fewer job opportunities. Companies had their profits reduced, and credit was either cut off or became more expensive. Confidence in the Portuguese financial system was also at a low.

The Portuguese economy had one of its most difficult periods of financial stability over the last
10 years

In times of widespread difficulty, the priority is safety. The managers and private bankers at Banco Carregosa have a strong culture of safeguarding. They believe the most effective way to increase clients’ wealth is to protect their assets. Risk evaluation is always of concerns and no decision related to clients or the institution is taken without measuring its potential impact. Through the experience of its private bankers and asset manager teams, Banco Carregosa delivers the most suitable risk and return balance for each client, through analysis to create the best investment solutions.

Building confidence is key
With that in mind the bank’s reputation is strongly based on its independence. With a small but solid group of shareholders – settled since its foundation – independence is its main asset. In fact, independent management decisions are the fastest way to integrity and therefore, for client and stakeholder confidence in the bank. One important aspect for building a reputation of independence is an open architecture approach to investments. At their discretion private bankers have a wide range of products and investment solutions available from different asset managers and other financial intermediaries. The investment team establishes guidelines and offers in-depth analysis, and private bankers work directly with clients on investment decisions.

Given the high level of asset prices driven by the very low interest rate environment since the last quarter of 2013, the bank recommends an overweight position in cash and absolute return strategies, while keeping stocks and bonds underweight. Taking advantage of the closeness to the local capital markets with tactical positions in some Portuguese stocks and bonds has also contributed to the return of the banks’ managed account portfolios.

The re-rating of Portugal’s risk level has buoyed these markets, and both local bonds and stocks have greatly over-performed the broad indices. Being very active in the origination and placement of structured products has meant the bank has favoured capital guaranteed products linked to equities and equity indices. Within assets classes, although for some time the bank has been concerned about the high valuations implicit in current stock prices, it continues to see long term value propositions in some European and North American stocks, particularly in the mid cap segment.

Hedging a strong position
In bonds, where the bank sees little or no value within core markets, its extensive experience in the Brazilian market has given comfort to tactically add some positions over the last 12 months. As a rule the bank does not take positions in other currencies, so it continues to recommend hedging foreign currency exposure. It has stayed clear of commodities and favours real estate – particularly in the commercial real estate area. In absolute return, managers that focus on long/short strategies in core markets are preferred. Clients are advised to have balanced and diversified portfolios, however, the bank also favours holding individual positions in some recommended stocks and bonds, as opposed to holding positions in actively managed funds.

Mainly dedicated to private banking, Banco Carregosa has recently developed online services, as until now it had exclusively focused on brokerage clients, through the mass-market brand GoBulling. Since December last year, GoBulling evolved into a universal financial platform and website, serving both brokerage and private banking targets. From an online brokerage platform, GoBulling became the online banking for Banco Carregosa.

The bank is now better prepared for the digital transformation that is expected to in the sector over the coming years, not only to respond to growing self-directed clients’ needs, but also for increasing efficiency through automation of key processes. In the context of such a challenging environment, Banco Carregosa has also looked for new niche services, building on its long experience in capital markets. One recent new line of business was introduced in 2013 targeting energy market opportunities.

To start, the bank has been admitted as general clearing member of the Iberian power derivatives market, and is offering both clearing and settlement services mainly to non-resident clients, as it is already one of the key players of the market in this segment.

As global dependency ratios rise, we must save more, says Argon

Posted on September 2, 2014 by Ashton Wenborn

As I will demonstrate in this article, high levels of debt and an ageing world mean lower growth, lower yields, higher taxes and higher economic volatility. The world’s population is retiring in bulk, requiring greater social support and leaving behind vast amounts of debt to be paid for by a dwindling working population. This isn’t a great recipe for markets or living standards, and there are no easy fixes. Reform is essential to escape the enormous debt burden governments have accumulated. This means a higher retirement age and more flexible immigration policies and labour laws. But austerity has already been painful and has proven very hard to enforce politically.

World War II left developed nations swamped in debt. Fortunately, the baby boomers, including women entering the work force over the last half century, swelled the working population while education, globalisation and urbanisation improved productivity. In addition, the establishment of consumer credit facilities and social security nets enabled consumers to live beyond their means. This combination of improving demographics, productivity growth and access to credit generated significant economic growth. This in turn generated more tax and reduced public debt.

Source: US Government Debt. Notes: Post-2013 figures are estimates

Since the 1980s public debt has increased again (see Fig. 1) and this time, unlike after World War II, we don’t have the luxury of economic growth to reduce it. Even before the 2008 recession, Western countries experienced falling growth. Growth from the 1960s to 2000 in the US averaged 3.5 percent, but dropped to 2.5 percent between 2000 and 2008. Since the recession hit, it has fallen to below one percent. Europe has suffered a similar fate. This is despite massive government fiscal spending; over 300 rate cuts globally; and in excess of $9trn liquidity from quantitative easing. Just because the US and Europe learned from Japan’s debt crisis, does not mean they will be able to avoid it.

The IMF predicts that by 2018 (a decade after the recession), world trend growth will be four percent lower than pre-recession and the only region to recover to pre-crisis levels will be Latin America. The two main culprits for lower growth in the future are an ageing population and high debt levels.

Ageing population
The United Nations predicts that the global dependency ratio (retired-to-working population ratio) will more than double by 2050. While developing nations have younger populations, their dependency ratios will actually grow faster than developed regions (see Fig. 2). More worryingly, research from Deutsche Bank predicts that the world’s population will hit replacement level fertility by 2025. This is a point at which human beings will no longer be reproducing enough to expand themselves as a species. Some of the effects of an ageing population are:

Structurally lower growth due to a shrinking workforce. The direct impact of an ageing population is a shrinking work force. The US Congressional Budget Office (CBO) forecasts a labour participation rate falling to 52 percent by 2038. This translates this into real US GDP growth of only 1.4 percent over the next 25 years; half the rate at which it has grown over the past 50 years.
Maturing urbanisation, which provides another growth headwind. One of the primary drivers of Chinese growth in productivity over the last 30 years was the transfer of workers from primary to secondary sectors as the population moved from rural to urban areas. However, this move is stabilising and is one of the reasons the Chinese government’s official growth forecast over the next decade is 30 percent lower than what was achieved in the past.
Taxes will increase due to higher social spending. Public expenses will increase due to the ageing population. The US CBO projects that social spending will reach around 15 percent of GDP in 2043 from 9.6 percent today, driven mostly by the cost of Medicare as the baby boomer generation retires. This will have to be paid for by higher taxes.
The ageing populations will create a savings glut. An ageing population lowers the demand for investment, as fewer new workers means less capital is required to produce new tools. Developing countries (particularly China) are only just now reaching the point of reduced investment. This means that more money will be chasing fewer investment opportunities, leading to higher valuations and lower yields.

Drowning in debt
Despite the huge stimulus from 300 rate cuts and $9trn quantitative easing, debt hasn’t come down. The developed world has seen a rotation from private debt to public debt, but total developed world debt is higher than before the recession. Similarly, emerging markets increased their debt levels, both private and public, to new highs, as quantitative easing provided cheap debt, which was used for consumption rather than investment. This had the advantage of closing the developed market growth gap after the recession but has led to a number of painful distortions in emerging markets, which are only now being addressed. The effects of high debt are:

Lower growth. Unwinding the high debt burden (government and private, emerging market and developed market) will be a constraint to growth. Some emerging markets will continue to drive consumption, but many have run up considerable current account and budget deficits and will have to reduce their spending. According to Capital Economics, most of the peripheral EU states are going to have to save more than they spend for the next 10 to 20 years to get debt down to safe levels.
Higher volatility. Another impact of high debt is increased economic volatility. The Economic Cycle Research Institute predicts that recessions will be deeper and more frequent over the next decade. When growth is low, even a small contraction can lead to a recession and when debt is high, any shock has a magnified effect and can cause a contraction.

Over the next decade, returns are going to be lower than we need and taxes will be higher than is fair. We will have to save more and spend less, starting today. Developed markets (and others such as South Africa) have too many headwinds to produce decent returns, but the complexity of their markets allows for good active returns through absolute and hedge funds. But diversification into emerging and frontier markets with low debt and growing working populations is a must. Nigeria and Mexico are two current favourites.

For further information visit argonassetmanagement.co.za

RCBC leads the Philippines’ banking revolution

Posted on September 2, 2014August 28, 2014 by Ashton Wenborn

The Philippines is looking at a banking revolution. Looming ASEAN integration and an increasingly banked population is fostering the need for banking innovations as well as broad, industry M&A in order to bolster the sector against the capacity and experience of foreign actors.

The Rizal Commercial Banking Corporation (RCBC) is one of the country’s leading banks with about $10bn in assets and more than six million account holders. Licensed for commercial and investment banking, the firm has gone from strength to strength in recent years, looking to accommodate a broad range of customers and grow its business in order to meet demand from new markets and an increasingly competitive domestic sector.

Having migrated to the core-banking platform Finacle in 2012, the bank has launched a series of ‘smarter solutions’, which refers to the wide range of products and services that it is now able to offer to its clients. After RCBC migrated to the modern and sophisticated IT system, the bank has introduced new innovations that not only cater to the daily banking requirements of its customers but, more importantly, anticipate their banking needs.

“RCBC is the first bank in the Philippines to migrate to a scalable, nimble and one-of-its-kind core banking platform. RCBC can now capitalise on a unified system to deliver consistent and superior services, better and new products, with faster time-to-market rollout, improved operations and administration processes with the cost greatly being reduced,” RCBC’s Head of Corporate Planning Gerald Florentino told World Finance.

$10bn

RCBC assets

“Given RCBC’s emphasis on electronic banking options for its clients, the bank is able to serve its customers’ needs through alternative channels, without them having to physically go to a traditional bricks-and-mortar branch. This saves customers precious time, money and effort. Electronic banking also allows them to transact and go paperless, which is, obviously, a friendlier option in conserving environmental resources,” explained Florentino.

Diverse product range
Since the migration to the new platform two years ago, RCBC has increased its daily transaction volume by 53 percent, from 980,000 in 2012 to 1.5 million in 2013, suggesting that customers have taken well to the new series of online and mobile products. The range is diverse and seeks to cater to everyone from high-net-worth individuals to SMEs to entrepreneurial women. Its product range accommodates corporate needs such as automated payrolls and an electronic payment processing solution, while other products, such as internet banking via RCBC AccessOne provide customers with 24-hour banking access.

A key offering in the corporate business area is RCBC’s Retail Employee Savings Plan launched in 2012. The plan pools together employee contributions for collective investment and reinvestment in RCBC’s Rizal Peso Money Market Fund and is designed to make investing in Rizal Unit Investment Trust Funds affordable and convenient for company employees. This product encourages employees to increase their personal savings by regularly setting aside funds from their monthly payroll to augment their retirement needs.

In addition, with the growing number of sophisticated investors looking for further diversification, RCBC Trust is set this year to provide its high-net-worth individual customers and big corporate accounts a facility to invest in offshore equities via direct investment in global equities listed in selected exchanges or via global equity feeder fund. Through these new products, offshore investing becomes easier and more convenient for RCBC’s clients, as they need not open accounts and deal with various foreign brokers to achieve global diversification.

Interestingly, the bank has also launched a product aimed exclusively at women. The RCBC e.Woman Savings Account is the country’s first deposit account specially designed for women, where depositors can enjoy perks and privileges such as free life or accident insurance and discounts from relevant partner merchants across the Philippines. With banking customers becoming increasingly picky and looking for personalised service, the e.Woman account comes at a crucial time for the industry. Its specially designed chequebook, chequebook holder, passbook and ATM card currently has a total of 50,000 account holders and numbers continue to grow as the demand for such products keeps increasing.

Unprecedented competition
Having a strong product range that can accommodate many different customers is crucial at a time when the Philippine banking industry is facing major changes that could provide local banks with unprecedented competition.

Current President Benigno Aquino is expected to sign into law amendments that will significantly change the country’s Foreign Banks Liberalisation Act. What’s more, the upcoming ASEAN economic integration by the end of 2015 and the ASEAN Banking Integration Framework by 2020 will have implications for loans, investments, and other business exposures for banks. As part of the integration, the Bankers Association of the Philippines has been backing legislation that would further allow the entry of more foreign banks into the country. Since Philippine banks are relatively smaller in size and scale, further opportunities for mergers and acquisitions are being encouraged across the industry, as a means to adapt to increased competition coming from other ASEAN member countries.

To bolster these efforts and ensure the local sector against future financial crisis, The Bangko Sentral ng Pilipinas (BSP) has required banks to do stress tests through the Internal Capital Adequacy Process framework. The BSP has also further liberalised foreign exchange rules, especially on forex outflows, to adapt to the requirements of the growing economy and the upcoming regional integration. What’s more, the lifting of the 15-year moratorium on opening new bank branches in eight restricted areas in Metro Manila starting July 1 2014 is expected to result in an improved quality of service for customers, as well as allowing banks to cross-sell financial products (e.g. bancassurance, debit/credit cards) to provide additional service to clients.

This opening and bolstering of the Philippine banking sector has increased the difference in size between commercial banks significantly, with the top three banks (BDO, BPI, and Metrobank) growing markedly. This has prompted banks like RCBC to remain engaged in their opportunistic acquisition activity.

“To quote our President and CEO, Lorenzo V Tan, RCBC is optimistic about the opportunities to partner with foreign banks and securities houses such as Japan’s Resona Bank, Saitama Resona Bank, Kinki Oska Bank, Okasan Securities, and Bank of East Asia (HK-China). These strategic partnerships aim to further extend the bank’s reach to multinational corporate and investor clients and expand our capabilities via transfer of technology and best practices. These new partnerships brought us 32 new Japanese corporate clients in a span of 24 months and institutional Japanese investors buying Philippine Equities through RCBC Securities,” said Florentino, adding that RCBC will continue to seek opportunities for partnerships with non-financial institutions for credit and debit card co-branding in order to expand the firm’s reach beyond the bricks-and-mortar.

Bolstering finances
By diversifying its business, RCBC has set the bar high for coming years. According to Florentino, this has been necessary in order to meet recent regulatory requirements. Notably, local banks in the Philippines are working hard to comply with Basel III requirements, which are more stringent in the way they’ve been implemented in the Philippines. For instance, the local total capital adequacy ratio requirement of 10 percent is higher than the international standard of eight percent and was implemented earlier compared to other countries. As a result some banks needed to raise additional capital to comply with this regulation. Having grown customer numbers and assets significantly in recent years, RCBC has made strides in bolstering its financial strength, but according to Florentino, the work isn’t over yet.

“In spite of the numerous remarkable achievements that RCBC already accomplished over the past five years, the bank continues to set ambitious goals that it aims to achieve in the next five years. We want to achieve higher shareholder value close to a return on equity of 15-20 percent, foster a deeper relationship with our customers, ensure that each customer is using five of our products within the next five years, expand and increase usage in our electronic distribution channel in order to achieve a 4:1 ATM-to-branch ratio, improve our operational efficiency, and finally, diversify our portfolio so it is oriented towards actuarial risk vs. wholesale risk, through i.e. a 50 percent focus on corporate, 30 percent consumer and 20 percent SME,” explained Florentino.

With the Philippine banking industry having posted significant growth and total bank assets having doubled in five years to PHP 10trn, the local banking industry is without a doubt in the midst of booming growth. On the verge of a new competitive era, diversification, technological innovation and a solid bank balance such as RCBC is without a doubt a strong offence that will meet the needs of Philippine banking customers.

Brazil dives into recession; Rousseff clings onto her seat

Posted on September 2, 2014September 2, 2014 by Ashton Wenborn

Following years of stagnant growth and two consecutive quarters of contraction, Latin America’s largest economy has finally entered recession. The economy’s second quarter losses came in at 0.6 percent after a dismal first quarter contraction of 0.2 percent, leaving President Dilma Rousseff with a mountain to climb before October’s general election.

The recession is Brazil’s first since the financial crisis and again hints towards Rousseff’s poor performance when it comes to driving the national economy. While the economy expanded by an average rate of four percent from 2003-2010 under the ruling of her predecessor Luiz Inácio Lula da Silva, growth under Rousseff’s government has since averaged out at less than two percent.

It is thought that the recession has wiped approximately $11bn from Brazil’s balance sheet

Regardless of these shortcomings, Rousseff and her centre-left Worker’s party remain the favourites for re-election, with environmentalist Marina Silva and Aécio Neves of the PSDB party following closely behind. The ruling coalition has long been unpopular among the country’s investment circles; best illustrated by the fact that Brazil’s stock market actually rose upon the news that Brazil had entered recession. However, the country’s low unemployment rate means that the government’s popularity still remains intact.

Critics insist that Brazil’s economy is overly reliant on domestic consumption and credit growth, and that Rousseff’s attempts to privatise selected concessions have come too late to make any measurable difference. It is thought that the recession has wiped approximately $11bn from Brazil’s balance sheet, despite the subsequent levels of spending that accompanied the FIFA World Cup tournament and continued bids from the government on that front to boost investment.

Although two consecutive quarters of contraction amounts to a technical recession, those in power have been quick to dismiss such a label. “I want to emphasise that even really organised countries are having problems getting better growth,” said the country’s Finance Minister Guido Mantega. Pointing to the country’s stable unemployment numbers, Mantega insisted that the downturn was due to circumstances unique to the period.

ACWA Power promotes social development of Saudi Arabia

Posted on September 2, 2014September 2, 2014 by Ashton Wenborn

For ACWA Power, it is not enough to provide clean water and electricity to people: the company is also concerned with the social and economic development of the communities in which it operates. Based in Saudi Arabia, it is an international developer, investor and operator of power and desalinated water plants, and a corporate social responsibility force in the region, ensuring that the needs of the population are being met.

It invests in a number of public and private partnerships with the Saudi government, aiming to empower communities by meeting all their growth demands when it comes to water and power. Paddy Padmanathan, President and CEO of ACWA Power, spoke to World Finance about sustainability, social economic development, and ACWA Power’s plans for the future.

What initially attracted the firm to projects such as the Higher Institute for Water Power and Technologies (HIWPT)?
The primary objective of the institute is to enable Saudi Arabia’s power generation and water desalination sector to be staffed by homegrown, first-rate operators and technicians. With this in mind, it is our intent to ensure that from the outset the institute becomes a thriving and self-sustaining place that inspires young Saudis to enter the power and water sector, allowing it to become the polytechnic of choice for trainees and employers, based on reputation and quality.

ACWA Power net income:

2011

SAR 280m

2012

SAR 331m

2013

SAR 459m

Clearly the institute will also therefore contribute to the creation of an employable pool of skilled resources, and given the shortage of these resources in this sector will directly impact on reducing the high unemployment problem in the kingdom.

As a business that is investing billions of dollars up front and collecting our investment back by selling electricity at a few cents per kWh and/or desalinated water at a few cents per litre over 20-25-year contracts, the sustainability of the markets we operate in and the social and economic development of the communities who ultimately consume what we supply is absolutely critical to ACWA Power. This is what will ensure continued affordability of and willingness to pay for the water and electricity we produce, which in turn will ensure we get the reasonable level of return we are seeking on the investment we make.

ACWA Power therefore ensures from the outset that in making our investment, in getting the electricity and desalinated water plants built and then subsequently over 20-25 years operating and maintaining them, we maximise the opportunity to retain as much value as possible in the local economy and generate the maximum possible true value by creating employment opportunities for the local people. In addition, ACWA Power sets aside a portion of its revenue to support community development activity, wherever our assets are located, all with the mindset of ensuring increasing the health, wealth and happiness levels of the communities within which our plants are located.

Quite apart from all this, given that we need to sustain our operations at the plant for 20-25 years, in the long-run we also need to focus on how best to ensure a reliable source of skilled professionals we require to operate and maintain our plants and quite clearly this means looking towards the citizens of the country rather than expatriate workers.

As we started to build our business in the Kingdom of Saudi Arabia (and now we are seeing something similar in other geographies that we are operating in) we saw a significant skills shortage, particularly at the technician level; the much-needed skillset to operate and maintain our power generation and desalinated water production plants.

We thus decided that we should help ourselves and fulfil our own objective of local employment creation and value retention in the local economy by establishing a training school focused on delivering what we need.

What influence do you believe it will have on the local population?
HIWPT is selectively recruiting promising school leavers to sponsor for training, thus empowering local communities. The sponsoring companies also offer all the trainees at the institute employment contracts with guaranteed jobs upon satisfactory completion of the 30-month programme. Thus, on graduation, they return to their communities and take up employment at the nearby power or desalination plant to start a meaningful and stable career.

Practical lessons at the Higher Institute for Water and Power Technologies in Rabigh, Saudi Arabia

Currently, the majority of teachers are English-speaking foreign nationals, as all training is delivered in English. In due course, the intention is also to encourage the development of a group of local trainers to consolidate the sustainability of the institute itself.

Are there any other organisations involved?
While ACWA Power originated the concept, established the need and funded the development of the institute from the business plan to curriculum structure, the value of partnership with a wider stakeholder community was recognised. Today, the initiative’s success is very much based on strategic partnerships spanning from government authorities involved in promoting and funding technician training, to water and power infrastructure sector participants, industry leaders and plant operators. The board of directors includes representatives from two governmental departments and four sector partners, with trainees coming from 14 different enterprises involved in the power, water and utility service provision sectors.

What is your relationship with the government on the project?
The initiative started by ACWA Power was ultimately translated into an agreement with the Saudi Arabian Technical and Vocational Training Corporation (TVTC) in 2008. The outcome was a strategic partnership programme between the private and public sectors to jointly establish HIWPT in Rabigh, and as such the institute is well positioned to meet the overall objectives of the government: to promote skills development and create local jobs.

How long will the institute last?
HIWPT is not an initiative with an expiry date. Indeed, it has been purposefully established as a non-profit, self-funding enterprise to ensure its sustainability as a valued sector and community resource. The initial focus has been on maturing the vocational training programme for school leavers starting on their apprenticeship career as technicians and operators.

Future plans aim to broaden the training programme to offer short technical and safety courses that will provide both entry level and more advanced training to the entire network of industries along the Red Sea coast. The success of this initiative has given sufficient confidence for HIWPT to expand its student intake numbers, and to facilitate this the TVTC has made a budgetary commitment of $70m to construct a 40,000sq m campus with trainee and teacher accommodation at Rabigh, with a target opening date of September 2017.

Was Rabigh chosen for a particular reason?
Recognising that electricity generation and desalinated water production plants are usually located at remote sites and operation and maintenance staff need to commit to being located at those sites for medium-to-long durations, a conscious decision was made at the outset to select trainees from remote locations, preferably from communities located in the vicinity of plant sites, and to locate the institute itself away from glamorous urban conurbation so as to minimise the risk of trainees being tempted to seek employment opportunities in the urban areas. The peri-urban area of Rabigh was also selected as it is conveniently located within reasonable distance of six of ACWA Power’s own desalinated water production and electricity generation facilities and the head offices both of our operations and those of our maintenance subsidiary company.

Do you have any plans for similar initiatives?
We have used the experience gained from HIWPT to guide our training and socio-economic plans in each country that we are expanding our portfolio of electricity generation and desalinated water production assets into. Thus, attached to our concentrated solar power plant project in Morocco, Noor 1; at the Bokpoort Concentrated Solar Power Project in South Africa; and the coal fired power plant being developed at Moatize in Mozambique, we are already considering the initiation of similar training facilities. In the interim at all these locations we have already embarked on local community development initiatives, many of them focused on construction skills development to enable the sites to benefit from the opportunities offered by these very large scale construction programmes.

Slimming down: Mexico’s telecoms master looks to offload assets

Posted on September 2, 2014 by Ashton Wenborn

It’s not every day that Carlos Slim, one of the world’s richest people, decides to throw in the proverbial towel. But then Slim, who has amassed much of his multi-billion-dollar fortune in the telecoms market of his native Mexico, is a pragmatist, and has always been quick to grasp the political realities of a worsening business climate. In short, he needs to offload some of his domestic assets before he’s forced to do so, with local politicians finally tightening the screws on him and others.

Telecoms and broadcasting reforms now being implemented in Mexico also mean the enforced pruning of Slim’s America Movil empire will have ramifications, not only for the domestic market but also further afield. According to his own bankers, Slim will look to deploy a war chest, once the assets are sold, that could amount to $20bn.

Even when the dust settles and the newly slimmed down America Movil emerges, it will remain a major beast in the Mexican jungle

Though Slim has yet to indicate the assets to be sold off, America Movil, Latin America’s biggest telecoms company, which includes (former state enterprise) Telmex and Telcel, its fixed line and mobile subsidiaries, will see its overall domestic market share trimmed to below 50 percent. Telmex and Telcel presently enjoy market shares of 80 percent and 70 percent respectively.

Overall, it has more than 270 million mobile and 70 million fixed-line, broadband and TV subscribers, which includes 73 million subscribers in the Mexican market alone.

The new rules, signed into law in July 2014 by President Enrique Peña Nieto, marked the culmination of a pledge made when taking office 21 months ago to boost competition in Latin America’s second-largest economy.

Slim pickings
Slim’s initiative – aimed at escaping the antitrust measures being applied to dominant players by new watchdog the Federal Telecommunications Institute (IFT) – will still mean America Movil having to present its plan to the regulator.

The IFT, which has been given powers to break up dominant players if necessary, will only free America Movil from tougher regulations once effective competition conditions exist.

Slim, who has already come under pressure to share his infrastructure with domestic competitors such as Spain’s Telefonica (which has a 20 percent market share), is willing to play ball and keep the regulator happy if it means he can enter lucrative markets he has previously been kept out of, such as pay TV.

If the beefing up of powers for the new regulator sends out a strong political message it also reflects years of weak regulators and inadequate laws that allowed major companies to stall regulatory decisions in court, often for years.

Yet even when the dust settles and the newly slimmed down America Movil emerges, it will remain a major beast in the Mexican jungle.

Evidence of the negative impact of Slim’s market dominance, at least when it comes to cost and quality, can be seen in the OECD’s 2013 report Mobile Handset Acquisition Models, OECD Digital Economy Papers, No. 224, which found Mexico to be the most expensive of 12 major markets for a basic talk, text and data mobile phone plan (see table opposite).

Another survey, from internet metrics provider Ookla, found Mexico to be the 41st most expensive (of 64 markets monitored) for monthly broadband costs per megabit (US dollar terms).

Though Slim remains non-committal about how his assets will be offloaded he has indicated any sale will be to an operator with the necessary scale and financial clout to compete effectively in the Mexican telecoms market. Slim has always maintained the relative weakness of his immediate competitors has been down to their lack of capital investment. This would seemingly preclude Mexican companies – the attention instead shifting to foreign telco giants such as AT&T, which may be looking to directly enter the market.

Finding a buyer
Meanwhile, there are currently no plans for America Movil to sell its cell phone towers – the company looking instead to opening them up to anyone interested in renting them.

In a July interview with Reuters, Slim said the company would continue to pursue expansion into central and eastern Europe through its investment in Telekom Austria and reiterated he would likely sell his Mexican assets to a single buyer.

AT&T, a long time investor in America Movil, may yet prove to be a long shot though, having recently confirmed it intends selling its eight percent stake as it looks to buy TV company, DirecTV.

Other potentially interested parties include China Mobile, Huwai Technologies and Deutsche Telecom – all of whom would be entering the Mexican market.

Slim and Telefonica meanwhile have been crossing swords not just in Mexico but also in Brazil where Telefonica is the leader in that country’s mobile market through its Vivo unit, and where Slim may be looking to grow his relatively small market share of 25 percent.

Telefonica already has a potential conflict of interest being not only the owner of Vivo, but also an indirect shareholder in number-two player Telecom Italia’s TIM – a point already noted by Brazil’s regulators who are looking for some form of consolidation. Resolution of this particular issue could present an opening for Slim to raise his market share.

As Slim has expanded his substantial non-telecom holdings, which include oil, mining, banking, construction and a 17 percent stake in New York Times Company, among others, he has simultaneously striven to reduce America Movil’s dependence on the Mexican telco market. Indeed, 65 percent of its sales now come from outside the country against just 30 percent a decade ago.

International expansion
While Slim intends to commit more money to energy and infrastructure investment in Latin America, telecommunications investment overseas remains an attractive proposition for him.

Most intriguing of all, is whether Slim will use some of the proceeds from his forced sales to increase his footprint in the US, where America Movil’s TracFone unit is the fifth-largest domestic mobile provider. That unit, which rents space on networks run by the likes of AT&T and Sprint, provides pre-paid mobile services through well-known US retailers and has largely grown through the buying up of a clutch of smaller pre-paid operators.

Yet part of the problem for TracFone, with its 25 million subscribers, is that it barely saw any growth in the second quarter of 2014. The question remains whether Slim will be content to tread water in terms of market share or look to expand via a major share stake or acquisition.

T-Mobile US, the fourth-largest operator was seen as a possible target – not least because its proposed merger with Sprint the third biggest provider, was likely to fall afoul of US regulators on competition grounds.

While America Movil’s management was quick to quell any idea of buying T-Mobile US outright, it was then suggested America Movil could be in for assets that would need to be divested should any T-Mobile/Sprint merger be signed.

Shoppers pass an AT&T phone store. The telco giant could be drawn to the Mexican market

That would appear to be a moot point now with Sprint having walked away from the ‘merger’ that valued T-Mobile at $32bn.

But perhaps not. With Deutsche Telekom – 67 percent stakeholder in T-Mobile US – long interested in offloading its unit – news of the failed merger with Sprint effectively brings T-Mobile US back into play. Though America Movil may not be interested in an outright purchase there is little stopping it building a sizeable stake along with others.

The demise of the Sprint/T-Mobile US merger clears the way for French telco Iliad to negotiate with T-Mobile US over a $15bn ($33 a share) offer for a 56.6 percent stake, which was already on the table. While T-Mobile US will likely reject the offer as too low, Iliad is looking to improve it by bringing in more investors and is reportedly in talks with US satellite and cable operators, Cox Communications, Charter Communications and Dish Networks to climb on board. Other potentially interested parties include the Ontario Teachers Pension Plan (OTPP) and various sovereign wealth funds, such as Singapore’s GIC.

The problem for Iliad, which has a 13 percent share of the French mobile market, is that it needs partners because it’s unable to raise more debt than the $13bn lenders such as BNP Paribas and HSBC.

Though America Movil has yet to be mentioned as a would-be partner in any proposed deal, the changing cast of characters ensures it at least has the opportunity to come to the party late should it wish to do so. However, given Slim’s growing European interests he may yet be content to ‘let sleeping dogs lie’ and pass on this occasion.

European ambitions
In Europe, America Movil presently holds stakes in Dutch operator Royal KPN NV and Telekom Austria AG. In May 2014 America Movil, which had a two percent direct stake in Telekom Austria and a 25 percent indirect stake through its Carso Telecom unit, submitted an offer, along with partner OIAG (the Austrian state holding company) to buy the public shares in Telekom Austria they didn’t already own.

Under the new arrangement, which had become mandatory, OIAG currently holds 28.42 percent with America Movil (direct and indirect) holding 50.8 percent. The deal is likely to have cost America Movil up to $2bn.

Slim’s European intentions were further bolstered by an announcement of the share offer of the proposed creation by America Movil and Telekom Austria of one of the world’s largest fibre networks.

The network, to be established between Vienna and Miami, would have a joint footprint with 200 points of presence stretching across 47 countries, via the interconnection of networks offering voice, roaming, data and mobile services. For its part Telekom Austria’s voice traffic would in future be processed through America Movil’s Latin American voice hub in Miami.

Despite a subsequent $545m write-down on its Bulgaria operations that will likely push Austria Telekom to a full-year loss, Slim clearly sees the long-term attraction of its Eastern European operations, even if many analysts still question the strategy, due to obvious shorter-term security considerations in the region and Austria Telekom’s still relatively low subscriber base – 20 million compared to America Movil’s 270 million.

If there is one thing that can be said about Carlos Slim, however, it is his inherent adaptability and the ability to sniff out an investment opportunity. Having said this, his investments don’t always work out – last year’s failed $9.6bn takeover of Dutch operator KPN left him nursing an estimated $1.2bn loss, according to one analyst, having earlier built up a sizeable stake. Slim also failed in a joint takeover bid (with AT&T) to buy Telecom Italia back in 2007.

Despite this, Slim has increasingly become a global player in recent years, having lessened his dependence on the Mexican market. And that is precisely why analysts, competitors and investors alike will continue to be kept guessing about what he’ll do next after raising additional cash from his Mexican asset sales. It could prove an interesting ride for investors.

How American Apparel is moving onwards and upwards after Charney

Posted on September 2, 2014September 2, 2014 by Ashton Wenborn

“One of the best known and most relevant brands in the world,” according to American Apparel’s interim Chief Executive John Luttrell, is in free-fall. The sweatshop-free retailer has failed to turn a full-year profit since 2009, its controversial marketing practices have dealt it a reputational knock or two along the way, and its founder and CEO Dov Charney has been ousted by a board brought to the end of its tether.

“Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead,” wrote an optimistic Co-Chairman, Allan Mayer in a June announcement. “We take no joy in this, but the board felt it was the right thing to do.”

A brief history of Charney
Starting out with the ambition to spark an industrial revolution in the apparel industry, Charney’s focus on American-made garments earned him a respectable reputation in industry circles. In 2003, the Montreal-born entrepreneur was listed alongside Bill Murray, Jon Stewart and Johnny Depp in GQ’s Men of the Year, and a year later was named in Details’ 50 Most Powerful People, alongside Frank Gehry, Steven Spielberg and even Arnold Schwarzenegger. Renowned for his philosophy-first mentality and voracious appetite for expansion, Charney quickly came to be seen as a pioneering name in the retail space.

Although Charney has proven himself to be an incredibly capable entrepreneur, he has likewise shown himself to be an incapable CEO

In the immediate aftermath of the Dhaka factory collapse, Charney offered his condolences to those affected and reasserted the importance of a sweatshop-free future for retail. “It is critical for us to know the faces of our workers,” he wrote in a company blog post. “The apparel industry’s relentless and blind pursuit of the lowest possible wages cannot be sustained over time, ethically or fiscally.” In a time where many in his field saw little other option than to outsource manufacturing to developing countries, American Apparel’s LA factory stood as living proof that the garment industry need not necessarily look abroad.

However, despite Charney’s admirable philosophy and various industry accolades, he is perhaps better known for his various run-ins with trouble. Since he started the company at age 20, his career has been punctuated by controversy, not least when in 2009 a probe found that a third of the company’s workforce were ineligible to work in the US, and again in 2012 when a former employer alleged Charney had choked and derided him.

Perhaps most characteristic of the executive’s quarter century-long stint at the helm, however, is a string of sexual harassment lawsuits, which have collectively tarnished the retailer’s reputation and caused no small degree of discomfort for those at the top.

Addressing the losses
Charney’s dismissal, therefore, is unsurprising, given the damages, financial or otherwise, that his endeavours have inflicted on the retailer. “Your conduct has required the company to incur significant and unwarranted expenses, including expenses associated with litigation and defence costs, significant settlement payments, substantial severance packages that were granted to employees, and unwarranted business expenses that you incurred for personal reasons,” read Charney’s termination letter, which was leaked shortly after his dismissal and posted on Buzzfeed. “The resources American Apparel had to dedicate to defend the numerous lawsuits resulting from your conduct, and the loss of critical, qualified company employees as a result of your misconduct cannot be overlooked.”

The now-former CEO’s unflinching focus on sex and unconventional management style has split opinion among observers, employees and board members alike. Last year, when a company warehouse in La Mirada struggled to keep its doors open, Charney made the place his home for three months; when he regularly paraded his factory in only his underwear he quickly acquired the nickname ‘pants optional’; and when he was forced to lay off 30 workers without the paperwork to work in the US, he offered them each $30,000 in company stock as compensation. Whereas some say his methods are responsible for the company’s high profile and iconic status, others cite those same methods as reasoning for the retailer’s continued losses and managerial deficiencies.

Although Charney has proven himself to be an incredibly capable entrepreneur, he has likewise shown himself to be an incapable CEO. American Apparel’s stock peaked at an impressive $15 in 2007, only for the company’s overreliance on debt and penchant for micromanagement to land the retailer with a debt burden of over $200m, and for its share price to come in short of 50 cents.

After losing $270m in the space of only four years, it’s little wonder that the board’s patience with Charney has worn thin – although it insists the decision to oust him was not financial-related. What has come as a surprise to some, however, is that the hedge fund Standard General has stepped in so readily to revive the company’s fortunes.

Jumping to the rescue
The New York-based hedge fund and major shareholder agreed that it would grant the retailer a $25m loan on the condition that it reshuffled management and used the money to repay Lion Capital on a $9.9m defaulted loan – originally not due to be paid until 2018. The key points of the agreement included a reconstitution of the company’s board, in which five of the seven members would be replaced, a continuation of the investigation into Charney’s alleged misconduct, and a guarantee that prohibited Standard General from acquiring additional shares.

“This truly marks the beginning of an important new chapter in the American Apparel story,” said Mayer in a company statement. “With the support of Standard General, we are confident the company will finally be able to realise its true potential.”

To add another twist to the rescue effort, Standard General has also struck a deal with Charney to acquire shares on his behalf and then loan him the money – $20m with a 10 percent interest rate – to purchase the shares from them. The deal leaves Standard General with a 43 percent stake in the company and Charney still on American Apparel’s pay scale as a ‘strategic consultant’, pending the results of the investigation. Of the pre-dismissal seven-member board, only the Co-Chairmen Allan Mayer and David Danziger remain, representing something of an overhaul for American Apparel, though not without a lingering whiff of the old Charney-inspired mentality. On speaking to Bloomberg Businessweek in July, Mayer appeared to have quite the same philosophy as Charney on what makes American Apparel unique. “I think it’s the tension between the transgressive part of the brand and the idealistic part of the brand that gives it its special place in the culture,” said Mayer.

“If you took out the sex, it would be kind of boring. And if you took out the idealistic component – our commitment to the sweatshop-free, made-in-USA philosophy – it would just be sleazy. But you put them together, and you have something that’s interesting.”

Among the company’s new additions to the board is the former CEO of Fischer Communications, Colleen Brown, which in many ways represents a major leap forward for the company. Known primarily for her management and operations expertise, the managing director of Newport Board Group and longtime media executive also looks to add a much-needed measure of diversity to American Apparel’s board. All things considered, the deal marks the beginning of a period of relative stability for American Apparel, although it also raises the question of why an investor would go to such lengths in order to revitalise a – some-would-say – broken company.

The repair job
Irrespective of the company’s corporate governance standards and dire financial straits, its influence among young, hip and affluent consumers remains very much intact. Little other than the company’s sexually charged imagery and ‘Made in USA’ philosophy set the retailer apart from its competition, yet willing consumers have propped up the company’s bottom line for years. The fact that the retailer’s success is resting on factors aside from financial stability, however, poses a potential problem in that consumers could just as easily wake up to the company’s fragility and flee in much the same way investors have.

Granted, American Apparel’s managerial oversight and lacklustre financial performance leaves a lot to be desired, although the retailer’s clout among its target demographic remains an asset worthy of investment. Whether Charney keeps on at American Apparel or not, the fact that he was once ousted from the top spot means that there is a serious commitment from those on the board to instigate a turnaround and realise what potential there is.

Whether the company will rid of jobs, outlets or even its ‘Made in USA’ philosophy remains to be seen, but it’s almost certain that American Apparel without its figurehead will be an altogether different beast. If the retailer had a more conservative head on its shoulders, it could well be in a better financial shape than it is now; however, few can argue that without Charney the company would not be the world recognised and – some-would-say – iconic brand it is today.

Japan wage growth highest since 1997

Posted on September 2, 2014 by Ashton Wenborn

Japanese wages in July saw their strongest annual increase since 1997, with earnings up 2.6 percent on the year previous. The development was welcomed by consumers, whose wages have so far failed to keep pace with the rate of inflation and compensate for the April sales tax hike.

“Wage growth surged in July, but is set to slow in coming months as the summer bonus season ends,” said Marcel Thieliant, Japan Economist at Capital Economics. “The summer bonus season ends in August, and bonus payments are set to fall sharply. As a result, the growth rate of overall earnings will mostly be driven by changes in regular pay. With base pay expanding clearly less rapidly than bonuses, wage growth will likely slow again but it should stay in positive territory.”

The figures came in much higher than anticipated and represented a sharp uptick on the one percent rise posted in June

The figures came in much higher than anticipated and represented a sharp uptick on the one percent rise posted in June. However, pay, when adjusted for inflation, still shrank for a thirteenth consecutive month, at -1.4 percent, and continues to stifle consumers’ appetite for spending. “Real earnings growth will likely remain negative at least until April’s consumption tax hike falls out of the annual inflation comparison, but with the yen broadly stable over the past year, price pressure is set to decline,” said Thieliant. “This should provide some relief to households.”

Regular pay exhibited a 0.7 percent year-on-year rise – the biggest climb since 2008 and a sizeable increase on the 0.2 percent equivalent in June – but special earnings were up 7.1 percent and accounted for close to two thirds of overall wage growth. Analysts expect the upward trend to continue, although it will take a concerted effort from corporates before real wage growth matches the rate of inflation and boosts household spending.

Japan considers legalising gambling

Posted on September 2, 2014March 22, 2018 by Ashton Wenborn

The 23rd chapter of Japan’s Penal Code prohibits any person from partaking in gambling activity, save for a few exceptions. Japanese high rollers are permitted to wager their wallets on horse, boat and motorcycle races, prefectures and large cities still hold small-scale lotteries, and pachinko parlours have found a way to skirt the country’s anti-gambling legislation and dole out cash prizes.

The circumstances here underline the absurdity of Japan’s antigambling laws which, according to critics, are starving the country’s economy of the stimulus it so desperately needs. True, the legislation is steeped in tradition and has stood now for over a century, though the vast majority of the country’s 127-million-strong population, not to mention its leader, are agreed that it’s now time to make way for a casino-led recovery. “Given the amount of pent-up demand in Japan, casino gambling could thrive,” said David Schwartz, Director of the Centre for Gaming Research at the University of Nevada, Las Vegas.

Learning by example
Now, after years of stop-start discussions and any number of administrative changes, the issue of introducing pro-casino legislation has finally made its way to the fore and onto the agenda of the Japanese Parliament, marking the last leg of what has been a marathon ordeal for the bill. The pathway to legalised gambling is a long and arduous one, though few today can ignore the economic advantages it could potentially bring. As was so nicely put in a recent CLSA report: “Hallelujah! Japan’s casino business will be drenched in cash.”

$187bn

Annual global Pachinko machine revenue, 2012

$38bn

Macau’s global gaming revenue, 2012

23.3bn

Passengers carried by rail in Japan annually

33 Japan’s global tourism rank, 2013

Asia’s foremost equity brokerage estimates that the introduction of a mere dozen or so casinos could contribute $40bn in revenue – not far off Macau’s $51bn equivalent and over six times more than what the Las Vegas Strip makes in a year. Add to that the prime minister’s ambition to make known Japan’s newfound business credentials for international firms, alongside efforts to bump up foreign tourist numbers before Tokyo 2020, and it looks as though the passage of a pro-casino law is looming large on the horizon.

The onset of globalisation, combined with increased average per-capita income and spending in South-East Asia, has seen the likes of Macau make a minnow of former gaming hubs such as Las Vegas. Buoyed by rock-solid economic fundamentals and an influx of wealthy tourists, the former Portuguese colony has come to rank as the world’s fourth-richest territory, and revenues for the region’s major casino players have risen hand over fist.

Proponents of the Japanese casino bill will want to replicate the success of Macau, although perhaps a more accurate comparison is Singapore, which cut the ribbon on two casino resorts in 2010 and a year later matched gaming revenues at the famous Las Vegas Strip. The scale and immediacy of success for casino gambling in Singapore has again reinforced the economic benefits Japan could stand to gain, and acted as motivation for the country to align its gambling offerings with those in neighbouring nations.

Source: CLSA, Japan National Tourism Organisation

There is another major lesson to be learned from Singapore’s gambling endeavours, however: that being a refusal to continually expand upon casino numbers or slacken gambling regulations can slow momentum and cost dearly. After an explosive introduction to the casino business, a marked reluctance to up the ante and build on the industry’s success has turned investors off to the straight-laced Singapore market. As a consequence, gaming revenues have fallen short of Las Vegas’ for two straight years (see Fig 2).

A new era for Japan
For the time being, however, the focus lies not with regulatory technicalities but with pushing a bill through parliament and gaining the necessary support from the public. Japanese Prime Minister Shinzō Abe, for one, has been taking pains to lay the foundations for international business to flourish in Japan, not least casinos, and from what has been said so far, there can be no doubt that the legislation constitutes an important part of the prime minister’s so-called third arrow.

Crucially, no prime minister has supported the push to legalise casinos prior to Abe, and proponents of the move believe that parliament must act now if it is to capitalise on government support and the opportunities that have come by way of the Tokyo Olympics. Beginning with Shintaro Ishihara’s tenure as Governor of Tokyo in the late 1990s and spanning a 10-year-plus period of whirlwind discussion, the casino legislation is as much a part of the political landscape as the issue of unemployment or tax itself. Granted, the approval process is drawn out, the social implications potentially dangerous, and support anything but unanimous, though many are of the opinion that a failure to make good on the support now could cast a long shadow on the legalisation.

Crowds gather at the Sega and Sammy booth during the Tokyo Game Show in Makuhari, Chiba Prefecture, Japan

“The legalisation process in Japan is a two-step process,” said Jay Defibaugh, Senior Research Analyst at CLSA Japan. “The first-stage law, called the Integrated Resorts Promotion Law, should be passed in an extraordinary Diet session due to take place from late September or early October to early December. Within the Promotion Law is a commitment to pass an Execution or Implementation Law within 12 months. The second-stage law will include various key details including issues on taxation, floor space restrictions, and whether local Japanese will be required to pay entrance fees. We believe that the first-stage law is likely to be passed in the extraordinary session.”

Many, including Defibaugh, are in agreement that a positive verdict is likely to arrive in the autumn session. However, there are some who are less than optimistic about the passage of a casino law any time soon, and believe the obstacles to progress to be too great. “Given the political process and the very emotional issues surrounding casinos, I think the likelihood of casino legalisation in the next year is very small,” said Ellsworth. “If the Japanese Parliament did pass legislation approving casinos, it would require a two-year study to decide all the details and administrative structure of the industry. There is pressure to have casinos up and operating in time for the 2020 Summer Olympic Games, but I think the opposition is too great, and it will be difficult to put all the pieces in place by 2020.”

Although supporters of the bill have put forward a compelling economic case for casinos, whether it is in relation to tourism (see Fig 1), employment or tax revenues, negative perceptions are still widespread, and are shaped primarily by fear of crime. “The Japanese are determined to look closely at the potential downside of legalised casino gambling, including problem gambling, the involvement of antisocial forces, and potential negative effects on the family and children,” said Defibaugh.

However, studies undertaken by CLSA suggest that opinions on casino gambling are not necessarily deeply held, which again emphasises the importance of capitalising on recent media and political attention.

Pachinko to cash in or crash out
Irrespective of the uncertainty, a number of major industry names outside of Japan have made their support known, and many intend to fund the casino rush should the legislation come to pass. Both MGM Resorts International and Wynn Resorts have said that they’re looking to boost their profiles in the country, as part of a wider plan to up their share of the highly lucrative Asian gambling market.

MGM, the largest casino operator on the Vegas Strip, stated in February that it would be willing to inject between $5bn and $10bn into the Japanese market, whereas Las Vegas Sands, the largest gambling firm in terms of market value, is ready to invest $10bn or “whatever it takes” to win a share. The fight to gain a foothold in the market is understandable, given that the country looks set to become the world’s second-largest gambling market, should the bill pass and conservative estimates of $20bn to $40bn prove accurate.

However, interest from major industry names raises another important point, which, according to Ellsworth, is “whether the government should consider partnering with international casino properties to manage and run the operations, or attempt to run the operations with Japanese business operators.” The dilemma centres on the all-important issue of who will benefit from legalised casino gambling and, more broadly, what the country stands to gain by turning tail on the ban.

One of Japan’s home-grown sectors that could either cash in or crash out as a result of the bill is the pachinko industry, which, despite stringent anti-gambling laws, has managed to skirt the restrictions in quite spectacular fashion. Take a look on any one of the country’s bustling commercial districts and you’re likely to see the neon-lit exterior of a pachinko parlour; often-garish establishments that house row upon row of pinball-slot-machine hybrids called pachinko.

The activity has come to represent something of a modern Japanese tradition, in particular among elder generations. However, an ageing player base combined with a distinct lack of investment means that attendance has sunk near enough consistently since the mid-1990s, and the introduction of the casino business to Japanese shores could either kill or kick-start the industry.

Major pachinko industry names claim that the introduction of casino companies could well present the industry with a chance to return to former glories, although there are some that remain unconvinced by the effects of such an adjustment. “To the extent that casino gambling would be pulling would-be pachinko players, it may have an adverse effect on pachinko,” said Schwartz. “How large of an effect would depend on where casinos are sited, how accessible they are, and how many there are. There may be a market for both pachinko and casinos.”

The end of smaller gaming?
There are some, however, who believe the implications of the legislation will affect different parts of the industry in very different ways. “The bigger pachinko operators seem to favour casino legalisation, as they feel recognition of pachinko as a casino operation would follow,” according to Ellsworth. “Some form of taxation would be close behind, and the small ‘mom and pop’ operators could be in danger of going out of business. An estimated 15 to 20 percent of the population plays pachinko, and I don’t believe those players would travel a long distance to play in the integrated-resort-style casinos [see Fig 3]. This could change if they were to legalise local slot parlours, but the effect on the pachinko industry could either be devastating or a lifesaver – it will be interesting to see how this kabuki plays out.”

Other analysts, meanwhile, insist that the overlap between casino and pachinko players will be limited, and that the two customer segments actually share very little in common aside from their contribution to gaming revenues. “Based on the widely accepted view that the initial build-out of integrated resorts in Japan would be limited to about four sites, the direct competition with the more than 12,000 pachinko parlours found throughout Japan will be limited,” says Defibaugh. “Also, pachinko is nearly exclusive to Japanese players, whereas foreigners will be an important component of expected spending at integrated resorts. This speaks to the idea that customer overlap will be relatively limited.”

The fact remains, however, that pachinko operators are perhaps the most capable gambling entities in Japan, and, should legislators decide to sideline international firms in favour of local players, machine makers such as Sega Sammy could well emerge as the biggest beneficiaries of the bill. Once the restrictions on big pay-outs and cash prizes are lifted, pachinko operators need no longer find themselves confined to the smoke-laden, flea-ridden establishments they are forced to operate in today, but could instead be relocated to cavernous and cash-rich casino halls.

At the time of writing, the future for casino gambling in Japan is still very much up in the air. Not knowing whether legalising the industry could open the floodgates for problem gamblers or compromise what few traditions remain for a country in the midst of a major transformation, the casino gambling industry’s prospects are highly uncertain. However, with the correct measures in place and the right partnerships, both the tourism (see Fig 4) and gaming industries in Japan will be cashing in.

Canada set for unified securities regulatory systems

Posted on September 1, 2014 by Ashton Wenborn

It appears that Canada is tying the last loose ends before its dream of a unified national securities regulator becomes a reality. Saskatchewan and New Brunswick have become the latest additions to the roster of provinces that have signed up to the unified regulator, bringing the total to four. Though nine provinces are yet to fully commit (the new directive will only come into force in 2015), the four that have joined represent around three quarters of the total companies with market capitalisation in Canada.

The Cooperative Capital Markets Regulator (CCMR) has been in the works since 2008, as a response to the fragmented structure of the current system. Because Canadian provinces are fairly autonomous, securities have been regulated independently, without a unifying authority for the entire country. For a long time, there appeared to be little or no need for such an organisation as authorities from Ontario, British Columbia and Alberta handled the vast majority of securities, and cooperated with each other through the Canadian Securities Administrators.

But the fragmented structure of this arrangement meant the regulators had a tough time reacting in a timely manner to market events. This became a particular concern during the 2007 financial crisis, and led to the Canadian government appointing an expert panel to review the system and work alongside provincial authorities to devise a more inclusive and agile national system.

Voluntary but enforceable
So far the soon-to-be CCMR is a voluntary enterprise, but as Ontario and British Columbia have already signed up, there is little doubt the new agency will have considerable bite. Saskatchewan and New Brunswick are relatively small securities markets in Canada, but Ontario and British Columbia command large swathes of the national market.

There have also been concerns about the way in which the federal government has gone about creating the CCMR

However, even as more provinces – notably Nova Scotia – continue to consider the benefits of joining a national register, others, such as Quebec and Alberta, have been vocal with their concerns. Both these provinces have significant securities markets operating within them and have expressed a deep reluctance to relinquish control over their regulatory affairs to a national body.

There have also been concerns about the way in which the federal government has gone about creating the CCMR: in 2011, a judge ruled its first attempt to underpin the new regulator with federal legislation and make it mandatory for provinces to join up was unconstitutional. That’s why the new CCMR is a voluntary regulator.

So far, the four provinces that have signed up to the Cooperative Capital Markets Regulator account for 53 percent of the entire securities market in Canada. when asked how negotiations were proceeding with the remaining nine provinces, Canadian Finance Minister Joe Oliver told reporters: “I can’t comment on our discussions with individual provinces and territories except to say that a number of them are moving at a good pace.”

Teeth and backbone
Despite Ontario and Alberta’s reluctance to join the volunteer regulatory body, the move for a more unified system has been a hit among industry bodies. “This is a significant development and shows that the momentum towards the creation of a Cooperative Capital Markets Regulator is growing,” said Terry Campbell, President of the Canadian Bankers Association after the announcement that Saskatchewan and New Brunswick had signed up. “It is important in the continuing efforts to strengthen investor protection and the efficiency in Canadian capital markets. The federal government has shown a great deal of perseverance and leadership on this important economic issue as Canada’s current fragmented system puts us out of step with other countries around the world.”

While it is understandable that some provinces might be reluctant to relinquish control over their regulatory systems, it is hard to argue against the overall benefits of a coherent and unified system. Though there are restrictions on the type of legislation that will underpin the agency, there will be complementary federal legislation to ensure the regulator has teeth, and that rules are enforced across the country with the same vigour and to the same standards. After all, there is nothing wrong with cooperation when it comes to regulation.

Could UBI be the answer to filtering money into the economy?

Posted on September 1, 2014January 18, 2021 by Ashton Wenborn

Unconditional basic income is a hot topic at the moment. The people of Switzerland, for example, are currently preparing for a national referendum on whether they should pay themselves a yearly income of CHF 30,000 (about £20,000), even if they don’t work. Other groups, such as Basic Income UK, have made similar proposals, though most have suggested a figure around £7,000 per year, which would be easier to fund than the deluxe Swiss version.

The idea of paying citizens an unconditional basic income has been around for some time, and has been tested on a small scale in a number of countries. To many people, it sounds like a utopian scheme. Indeed, Thomas More mentioned it in his 1516 book Utopia. It would mean that people wouldn’t have to work unless they truly wanted to. The government could also avoid micromanaging tax allowances, and different benefits for housing, food and so on. Although it is often presented as socialist, its appeal is broad-based.

Even Milton Friedman thought it was a good idea (though his version was called negative taxation), since he thought it would shrink the size of government and therefore pay for itself. The pros and cons of basic income have been debated in a series of World Finance articles and videos; but here I’m comparing the scheme with another method of handing out money – quantitative easing (QE).

Basic income vs quantitative easing
In some respects, basic income and QE are the opposite of each other. The term ‘quantitative easing’ makes no sense and seems like a deliberate attempt to obfuscate what is going on. Unconditional basic income, on the other hand, does exactly what it says on the tin. It hands out money, with no conditions.

QE attempts to stimulate the economy in a top-down fashion, by using newly created money to buy government bonds from private sector banks. The theory is that this should flood banks with money, which they will then lend out to companies, and this will boost the economy. However the banks might just hoard the money, or channel it into unproductive activities such as boosting house prices and paying themselves bonuses, which is why the jury is still out on the effectiveness of QE.

A basic income, in contrast, could boost risk-taking and entrepreneurship by giving people the time and space to experiment

The basic income on the other hand, just gives everyone money. It will have the largest impact on low-income people, who tend to spend their money rather than hoard it, so will boost economic activity directly. Of course, they might spend it on things such as drink, drugs or gambling. But a nice feature of basic income compared to QE, is that it is easier to test on a small scale, and the empirical evidence from a number of such studies shows the money is usually spent quite sensibly.

One thing the techniques have in common is they are both unconventional approaches that will have uncertain effects on things such as inflation. When QE was first proposed, it generated little controversy because no one could figure out what it was, but some people did worry that it equated to ‘printing money’ and so would boost inflation. Others argued the new money was just filling a void left by the implosion of credit instruments during the financial crisis, so inflationary effects would be muted. The latter appears to have been the case in the US and UK (so far), though asset prices certainly rose, which was part of the idea.

The inflationary impact of a basic income would also be mixed and uncertain. It won’t directly affect money supply since it does not involve creation of new money, though it may boost the rate at which it is spent. Inflation is affected also by economic behaviour, which will certainly change in ways that are hard to predict. For example, workers may demand higher salaries for undesirable jobs, but lower salaries for more rewarding jobs.

Easy money
The UK’s current benefits system tends to stigmatise the poor while incentivising them to not seek paid work, because if they get a job their benefits are cut. This makes it hard to wean them off state support, like certain banks. A basic income, in contrast, could boost risk-taking and entrepreneurship by giving people the time and space to experiment – and potential customers some money to spend. As record label owner Alan McGee has pointed out, the unemployment benefit system in the UK certainly helped to incubate the music industry until it was cut back – most musicians in the 80s and 90s seemed to have honed their skills while on the ‘dole’.

Perhaps the biggest impediment to a basic income is psychological. Our monetary and economic system is based on the concept of scarcity and competition. We have to fight for our lucre, and it seems morally wrong to get something for nothing. But much of the wealth in the economy is generated from public goods such as natural resources or land values, and what the father of social credit, the British engineer CH Douglas, called the “cultural inheritance of society”, which today would include inventions such as the internet or mobile communications. So it makes sense that some of these proceeds be considered a birth right rather than something that can be captured by a small group (for example shareholders in Facebook).

Also, some of our fears about giving money away have surely dissipated after the bailouts and QE. After all, many countries devoted a major fraction of GDP to rescuing banks. Why not rescue some single parents? Basic income is often discussed as something that is theoretically interesting but politically impossible. Which is strange when you think about it – shouldn’t money for nothing be an easy sell? Instead, it seems to be something that many people are uncomfortable with – even though QE was OK. But maybe it is time to relax those worries, and make way for a new kind of quantitative easing – one which makes life easier for a large quantity of people.

Scottish independence is merely about oil, whisky and finance

Posted on September 1, 2014 by Ashton Wenborn

Scotland finds itself at one of the most important junctures in the country’s long history. Since the Act of Unions was passed in 1707, England and Scotland have formed a heterogeneous and immensely successful nation. This 307-year-old union has allowed Scotland to import and export in other parts of the UK and across Europe without having to consider border controls, trade barriers, or use a different currency.

The country’s long-term future is balancing on a knife-edge. With a healthy list of stable exports, the country’s riches are based predominantly on sales abroad. Likewise, a number of intergovernmental trade agreements have aided Scotland’s ever maturing economy in its growth and development. As the country enters a new era, however, recent tremors on both macro and micro levels could see Scotland’s economy re-adjust to almost unrecognisable proportions.

Tackling exports
Exports like oil, gas and whisky could be worth up to £100bn, according to the Scottish Government. Official figures show that in 2012, Scotland’s international exports were worth £39.8bn and £58.3bn in the rest of the UK (see Fig. 1). But should the £100bn estimate – based on recent government stats – be taken with a pinch of salt? If correct, the data points to a prosperous independent state: a country that would rank among the top 25 biggest exporters in the world, ahead of Sweden and Indonesia. These figures pre-date the vote on independence and were based on projections about the amount of oil taxes Scotland would be able to recoup as an independent nation.

The rest of Britain has up to 80 percent of its oil and gas revenues tied up in Scotland, which shows the size of the industry the country holds. Wages in Edinburgh and the oil hub Aberdeen are growing faster than most regions of the UK, and there has long been evidence to suggest that Scotland’s economy would thrive as a solo nation.

$35bn

Annual value of Scotland’s oil and gas industry

$7bn

Scotland’s financial industry worth, per year

$4.3bn

Scotland’s annual whisky exports

These assertions are based on how much oil and gas is left in the North Sea. Since it peaked in 1999, production has slowly declined and the Office for Budget Responsibility estimates that production can continue for another 30-40 years before the reserves dry up.

But the prosperity of Scotland’s economy does not rest exclusively on energy reserves. Issues like debt burden, workforce productivity and demography are also important. The latter is a concern because the average Glaswegian man can expect to live an average of 72.6 years, the shortest life expectancy in the UK, according to data by the World Health Organisation. Scotland’s business must have a healthy workforce if it is to become the economic powerhouse Alex Salmond envisions. It will need to encourage and support the next generation of entrepreneurs and university graduates so they can develop bright ideas that can be grown into profitable enterprise. More importantly, Scotland must strengthen trade relationships with the international community, with foreign exports key to sustaining its industry if oil and gas reserves dry up by 2054.

It’s not all about oil and gas, however (see Fig. 2). After oil, single malt whisky is the country’s most lucrative export, worth £4.3bn annually. The Scottish Whisky Association (SWA), which represents the domestic and international interests of Scottish whisky, told World Finance in the run up to the independence vote that it harboured concerns over the ‘support’ of exports if Scotland left the UK. A spokesman declined to comment on the impact independence would have on whisky exports, stating only that there were ‘potential risks’.

Scotland’s financial industry contributes £7bn annually, employs over 200,000 people and is crucial to the economy. The Scottish Financial Enterprise (SFE) represents the financial sector, and in June published a briefing paper on some of the uncertainties Scottish business could face.

This report was controversial not least because SNP leader Alex Salmond personally tried to suppress its publication – it contradicted many of his claims on Scotland’s finances. ‘If there is a ‘Yes’ vote, many important questions instantly cease to be hypothetical and become both real and urgent… [Scottish businesses] will have to consider what, if anything, can be done to address the risks and uncertainties that arise,’ read the report.

Tourist tax
Scotland’s tourism industry is at a disadvantage because of air passenger duty (APD) tax. APD is paid on international flights into London and on flights between London and Scotland; tourists flying to Scotland usually go via London so APD tax is paid twice. This is hurting the tourism industry. If Scotland were to be independent, tourism – which accounts for three percent of economic income – could give the country a significant boost.

Currency conundrum
One much-talked about issue facing Scottish industry is what currency it would use. A poll by YouGov in February showed that more than half of Britons were opposed to a currency union with an independent Scotland. UK Chancellor George Osborne has since quashed hopes of Scotland using the pound, leaving three options: using it without Britain’s consent (sterlingisation) in the same way that Panama uses the American dollar; adopting the euro; or establishing an entirely new currency.

Forming an effective single market, maintaining international competitiveness and adapting to new financial regulation are other pressing uncertainties that businesses could face. Scotland is unlikely to suffer from a flight of foreign trade, though. Its biggest international market is the US, with an estimated £3.55bn in exports in 2012. China’s growing middle class could also give the sales of luxury items – like single malt whisky and salmon – a significant boost. Big importers like America and China will be crucial to strengthening the export sector if Scotland were not quickly accepted into the EU.

If this is the case, Scotland could join the Nordic Council, according to co-founder of Biggar Economics Graeme Blackett. He told World Finance that joining the Nordic Council would ensure Scotland maintained good trade relationships. “It would help in the global exportation of Scottish goods and to develop connections with countries involved in green growth,” he said.

He added that it’s imperative the financial industry retains close ties with London banks. Scotland exported £11.2bn in financial services in 2012, and the strength of the industry is linked to its close association with the city. “A single market that continues to benefit from relative proximity,” is key to the industry, said Blackett.

Business perspectives
Most Scottish businesses remained impartial in the run up to the independence vote – but not all of them stayed on the sidelines. Bus tycoon Sir Brian Souter, owner of Stagecoach, donated £100,000 to the Yes Scotland campaign for independence, while distillery William Grant and Sons donated a six-figure sum to the Better Together team. The fact that both Yes and No campaigns received donations from Scottish businesses goes someway to illustrating how divided the business community has been on the issue. It was unable to equivocally agree on what outcome would be more beneficial for businesses.

Scotland needs a individual approach to economic policy. It needs to ensure growth and demonstrate that it is capable of making its own decisions. Edinburgh provides an interesting example of the need for economic reform. Scotland’s second-biggest city has had control over a range of policy areas for 42 years thanks to the Local Government Act, and has done surprisingly little with it. Among its powers includes the ability to vary income tax by up to three pence to the pound. Its leaders have not exercised this right in over 40 years, which is hardly indicative of a country desperate to make its own decisions. Independent or not, local Scottish governments need to be given more power, and to exercise it.

Glasgow is set to receive a £1.13bn grant to help pay for infrastructure projects and employment programmes in the city. The grant is part of the City Deal policy, an initiative set up by the coalition government to give cities control over decisions that affect them. The deal will see the “creation of 28,000 jobs, generate £1.75bn annually and unlock £3.3bn of private sector investment”, said a Glasgow City Council spokesman. Westminster and Holyrood will both invest £500m in the scheme with the remaining £130m coming from local authorities in the Clyde Valley region.

The huge infrastructure fund – one of the largest City Deals in the UK – will be used to support projects like the long-awaited city centre to airport rail link, new roads and an improved bus service. The policy is one of the few nationally approved plans from the coalition government, but it may be politically motivated. Glasgow will only receive the sum of £500m from the British government if it chose to remain part of the UK, which at the time of writing was as yet undecided. Asked if the deal was a parliamentary bribe disguised as a sweetened pill, the spokesman denied it was a “gift”. Blackett was equally coy on the political undertones that have dogged the Glasgow City Deal, but emphasised £1bn isn’t enough. “Scotland needs an infrastructure fund of at least £5bn to compete internationally. And any such infrastructure package needs to be funded by Scottish investment rather than deficit funding,” he said.

The cost of change
Professor Patrick Dunleavy of the London School of Economics believes that independence would cost the Scottish taxpayer between £600m and £1.4bn over the course of a decade. His figure includes the cost of forming government bodies, an army and intelligence service, and would be equivalent of up to 1.1 percent of Scotland’s GDP. It is a high price, but Scottish nationalists would gladly take it over another 307 years with Britain.

If the people of Scotland choose to leave the UK on September 18, businesses will be faced with a number of risks and uncertainties. It is fair to question if exports will be worth £100bn, or if Scotland can become one of the world’s wealthiest nations, as Graeme Blackett hopes.

The headaches over oil and gas reserves, demography, productivity and international competitiveness are all ones that will need to be addressed. Regardless of whether Scotland is independent or not, the most important thing for its industry is that a dynamic economic policy is developed to nurture growth and support exports like oil and whisky.

Investors see the potential in Latin America’s corporate bonds

Posted on September 1, 2014July 24, 2014 by Ashton Wenborn

Latin American corporates have become an attractive asset due to growth dynamics and shifts in the region’s economic structure, its valuation levels and diversification opportunities, as well as lower political and geographical risk in comparison to other emerging market (EM) regions.

It has the most to gain from a recovering US economy, and the recent tensions between Russia and the Ukraine – along with higher political risk in Turkey and scepticism over the Chinese economy – have all led many investors to increase their exposure to Latin American markets.

Emerging ahead of the pack
Deutsche Bank’s markets research goes on further to explain how this is exemplified by inflows into Latin American focused fixed income funds since the beginning of 2014, accelerating to 2.9 percent of total assets (see Fig. 1), which compares previously to outflows of 10.7 percent and 9.1 percent for Asia and Emerging Europe-focused funds, respectively. This trend has also been reflected in Latin American corporates that are strongly outperforming their peers from other EM regions since the beginning of 2014.

According to the widely followed JP Morgan CEMBI Broad Index, corporates in Latin America generated a total return of 6.03 percent year-to-date, facing 3.38 percent and -0.07 percent for the corresponding Asia and CEEMEA sub-indices. Volatile countries from Latin America – such as Argentina and Venezuela – have very little corporate bonds outstanding and are mostly viewed in isolation from rest of Latin America. But even a slight positive political change can lead to large upside potential on corporate credits from these countries.

Source: Deutsche Bank Market Research. Notes: 2014 figures are year-to-date

Despite tapering the US Federal Reserve’s commitment to maintaining a low level of rate for a long time – and the ECB and Bank of Japan still being on the side of further unconventional stimulus – will keep the bid on higher yielding assets such as EM credits. As Latin American bonds overall have a higher duration than other EMs, they also benefit most from a contained yield level in the US treasury. Latin American credits have the highest amount of participation from US investors compared with other EM regions. For instance, JP Morgan data shows that 62 percent of the total new issuance volume from Latin American corporates in 2013 has been acquired by US Investors, compared to only 17 percent for new issues out of Asia and 30 percent out of emerging Europe and Africa.

Differentiating niche spreads
Spread levels of Latin American credits are much higher than US credits both in high yield and investment grade segments – providing further positive catalysts. According to Merrill Lynch, Latin American investment grade corporates on average provide a pick-up of around 125bps in spread compared to Northern American investment grade corporates from the US.

The spread difference increases further to around 250bps when looking at the higher yield segments. This is compared to a pick-up of around 60/300bps for Asia and 170/260bps for the Europe, Middle East and Africa region – the latter being reflective of the recent political tensions in Russia’s corporate space.

At the same time, Latin American corporate issuers offer robust credit and liquidity profiles. As of September last year, Merrill Lynch data has shown a comparable net leverage ratio of around 1.4 times for both Latin American and North American investment grade corporates from the US, while Latin American high yield issuers are showing significantly lower net leverages of around 2.9 times compared to four times for their US high yield counterparts.

Similarly, by looking at the respective liquidity ratios – as measured by cash relative to short-term debt – for both Latin American investment grade and high yield corporates (2.4 times and 1.6 times, respectively) relative to US corporates at 2.1 times and 1.5 times for the investment grade and high yield sub-segments. Taken together, this results in an attractive spread when adjusted by leverage of about 160bps for Latin America investment grade and 166bps for Latin America high yield issuers.

A great degree of diversity across issuer types is also of interest. According to further Merrill Lynch data, 30 percent of total new issuance volumes in 2013 can be attributed to the oil and gas sector; 17 percent to financials; 13 percent to the consumer space; and nine percent to telecommunication service providers, with the remainder being focused on the industrial and construction segments.

Latin America tends be a region with a low level of fiscal stimulus, leaving ample room for growth in the banking sector. Also, the financial sector tends to be a leading issuer in corporate bonds, and therefore the Latin American corporate bond markets a good place to be on the medium to long-term horizon.